Market Report – January 2, 2012

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In the Rear View Mirror: U.S. equities finished the last trading week of what was a volatile 2011 slightly lower for the week, including the final trading day of the year.  With the dust having settled on 2011, the Dow Jones finished the year higher by 5.5% while the Nasdaq and S&P 500 closed the year in the red.  The Dow’s annual performance was arguably impressive given that component Bank of America (NYSE: BAC) was down about 60%.  Or the Dow’s gains weren’t a big deal when considering the bulk of the index’s gains can be attributed to McDonald’s (NYSE: MCD), which is now a triple-digit stock.

Was 2011 really all that bad???

Since the New Year is here, let’s take a brief look back on why the performance of U.S. stocks in 2011 perhaps wasn’t all that bad.  Just remember all the macroeconomic issues that gave you heartburn this year.  Europe’s sovereign debt crisis was an obvious one, but don’t forget about the natural disasters that struck Japan in March and the political upheaval that gripped the Middle East for a good part of 2011.

Speaking of political upheaval in a micro sense…how about that U.S. debt ceiling fiasco brought to us, compliments of 535 clowns in Washington.  That might have been the biggest public display of economic ignorance and financial irresponsibility we have seen in a long time from our elected officials.  Citing a blog post on Seeking Alpha by Eric Wanger, President and Chief Executive Officer of Wanger Investment Management, who wrote:

In the end I agree with both Ben Bernanke and Standard & Poors, the only loser in this fight was U.S. financial credibility.  If you weren’t sure that our legislators would put partisan politics ahead of good fiscal governance, you are now.  For Pete’s sake gentlemen, we’re now being chastised by Communists on matters of fiscal responsibility!

Somehow we got through that too.  Turning back to macro issues, we cannot forget to mention the four-letter word that is inflation.  Yeah, but this inflation kind of messed with the emerging markets in 2011 which affected many a diversified portfolio.

There might be a bright side too!

It looks pretty clear that the U.S. is not sliding toward a double-dip recession.  Recent economic data is supportive of that notion, particularly on the jobs and real estate fronts.  We believe the real estate market is a long way from out of the woods, so any improvements, even small ones, are welcome at this point.   But the better the jobs and housing data, the more reason there is to be long riskier assets such as stocks and commodities.

The Markets @ 12/30/2011
Index Close Weekly % Change YTD Change YTD%
DJIA 12217.56 -76.44 -0.62% 640.05 5.53%
NASDAQ 2605.15 -13.49 -0.52% -47.72 -1.80%
S&P 500 1257.6 -7.73 -0.61% -0.04 -0.00%
NYSE Comp 7477.03 -41.63 -0.55% -486.99 -6.11%
NYSE Amex 2278.34 12.64 0.56% 69.96 3.17%
RUS 2000 740.92 -7.06 -0.94% -42.73 -5.45%
VANG INTL 13.06 -0.03 -0.23% -2.7 -17.13%
USX CHINA 4529.8 -51.51 -1.12% -1558.07 -25.59%


Market Report

Last week was a sluggish one in terms of volume, which is to be expected during a holiday-shortened week, especially when that holiday-shortened week leads to another.  There is an advantage to having the market closed twice in 10 days.  Stocks can’t go down on as many days thanks to bad news from Europe.  Sarcasm aside, it’s possible the European situation will improve in 2012, but trust us when we tell you that it will NOT be solved completely or quickly.

All major indices except the NYSE Amex flashed RED for the week and all ended the year in negative territory except the Dow (up 5.53% YTD), the NYSE Amex (up 3.17% YTD) and the S&P 500 which finished flat…as in no gain, no loss at 1257.6.
It’s also interesting to note that the blue-chip index closed the fourth quarter rather strongly, up 12%, which was the biggest quarterly percentage increase since 2003.

China stocks were the biggest disappointment this year of all the sectors we follow…with the USX CHINA Index losing a whopping 25.6%, followed closely behind by the Internationals which lost 17.13%…all of which may very well point to 2012 being a big opportunity for emerging markets.

Gold has looked like a small roller coaster of late…up one week and down the next.  This week it backed off $38.90 to close the year at $1,565.80.  Crude oil followed suit…off $0.85, closing at $98.83.
The dollar made a small upward move of +0.0049 or 0.7667 euros; the 10-year bond gained 1.344 to $101.094 and the 30-year bond gained 3.281 to $104.594.  Across the board, Treasury bonds have provided investors a YTD return of 9.7% which followed a 5.9% gain in 2010; returns that are not likely to be repeated in 2012…meaning, stocks could be the beneficiary of this flight to safety.

The Bottom Line for Stocks

We’re not fans of believing one trading day, one week or even a full month can determine the trend for the entire year, but there is irrefutable evidence that suggests how stocks behave in January plays a major factor in how they finish the year.  That said, we would like to see riskier asset classes get off to strong starts in 2012.

Small-caps leading a January rally would be preferable, but if the heavy lifting is left to large-caps, then hopefully, investors will pour cash into discretionary, energy and tech names.

Of course, if those themes don’t work, it could be to the benefit of staples and utilities.  Sure, many major staples and utilities stocks finished 2011 at or near new 52-week highs and plenty look overbought here, but if 2012 is a sequel to 2011, then you’ll want to be selectively involved with some names in these two groups.

With another nod to stocks, the reality is no short-term cash or fixed income instruments can offer the yield of a Duke Energy (NYSE: DUK) or Procter & Gamble (NYSE: PG).

So…Happy New Year all.  And, we’ll do our best to make it a profitable one for you.

Research and Editorial Staff
MicroCap MarkePlace